As I mentioned in the previous article, one of the buckets I’m going to create is a 401k bucket. My company uses Fidelity for 401k plans, so fortunately it was relatively easy for me to come up with an action plan for this bucket.
The Fidelity 401k plan I’m enrolled in is pretty typical, and let’s you enroll in a variety of different funds depending on your goals and risk tolerance. Some of these are based on a retirement date that you set, while others are index funds that seek to provide results that correspond to the total return performance of stocks that are traded in the United States. I prefer these funds to the ones that are set by date since they seem like a better fit for my overall plan and give me a better idea of what I’m investing in. The Seeking Alpha article recommends putting 40% of the 401k bucket into a Large-Cap Domestic stock fund, and as an example one of the index based funds that you can choose in the Fidelity 401k plan I’m enrolled in is the FXAIX fund, which might be a good match for this requirement and also happens to have a good rating on Morningstar. There are several other options to choose from as well and together they are enough to come up with an allocation similar to what is recommended in the Seeking Alpha article.
The Seeking Alpha article lists out two options for the 401k bucket. One is buy and hold option, and the other is risk-hedged rotational approach. In my case I see benefits to both options, but don’t like the idea of trying to time the market too much so I’ve decided to go with a hybrid of the two options. I’m basically going to come up with an allocation once a year, and then review the performance and market conditions at the end of the year and decide if I want to increase the allocations in some or all of the funds I’ve chosen to invest in. For example I’ve decided to increase my allocations in foreign markets and emerging markets this year as well as corporate bonds since the market volatility is still higher than usual, and I suspect U.S. stocks are currently overpriced and there is a chance that they could underperform this year. I also think long term treasury rates are starting to rise, so I decided to invest in corporate bonds rather than one of the treasury index funds, although I’m sure I’ll be putting some amount of money back into those at some point in my life. I’m not going to list the specific allocation percentages I chose or go into any other details, but now that I’ve chosen my plan for the year I’m going to stick with it until next December and then evaluate the performance along with the current market conditions to see if I want to move anything around.
In terms of the contribution amount I’m currently contributing the full amount that my employer matches. As time goes on I hope to increase my overall savings amount and if I’m able to do that I would either increase the amount I’m contributing to my 401k, or invest in crowdfunded real estate or municipal bonds through my individual brokerage account, but for now my priority is to contribute this amount to my 401k and then max out my Roth IRA contributions before allocating savings into any of the other buckets.
In the next article, I’ll go into further details about my Roth IRA bucket, which I will use for my dividend growth and high growth investments.